The tourism industry is a major contributor to economic growth and development, especially for emerging markets and developing economies (EMDEs). While traditional factors like economic growth, political stability, and infrastructure play a significant role in attracting tourists, recent research suggests that financial inclusion is another crucial element.
This blog post, based on insights from two of my recent academic papers (co-authored with Sasidaran Gopalan), will explore how financial inclusion can boost tourism demand, particularly in EMDEs.
What is Financial Inclusion, and Why Does It Matter for Tourism?
Financial inclusion refers to the accessibility and usage of financial services by individuals and businesses. This includes access to formal credit markets, savings accounts, insurance products, and digital financial services like mobile payments.
Financial inclusion can impact tourism in several ways:
- Supporting Tourism SMEs: Increased access to financial services allows small and medium-sized enterprises (SMEs) in the tourism sector, such as hotels, restaurants, and tour operators, to access credit, invest in their businesses, and offer better services. This, in turn, attracts more tourists and stimulates tourism demand.
- Facilitating Tourist Spending: For tourists, financial inclusion translates to easier access to ATMs, convenient mobile payments, and a wider range of financial services in the destination country. These factors make the tourism experience smoother and encourage spending, boosting tourism revenues.
- Encouraging Outbound Tourism: Financial inclusion can also promote outbound tourism, benefiting both the origin and destination countries. When citizens have access to financial services, they can save more and access travel loans, enabling them to travel abroad. This outbound tourism can, in turn, lead to increased awareness and interest in the origin country, potentially boosting inbound tourism in the future.
Figure 1: Pathways Through Which Financial Inclusion Enhances Tourism
Empirical Evidence: Financial Inclusion Leads to Tourism Growth
The studies provide compelling evidence of the positive impact of financial inclusion on tourism demand.
- In the first study titled “How does financial inclusion influence tourism demand? Empirical evidence from emerging markets and developing economies”, published in Tourism Recreation Research, we found that higher financial inclusion significantly increases tourism demand in a sample of 85 EMDEs from 1995 to 2017. The study used several measures of financial inclusion, including access to bank branches and ATMs, and found consistent results across different specifications.
- In the second study titled “Promoting outbound tourism through financial inclusion: Evidence from emerging markets and developing economies”, published in Annals of Tourism Research Empirical Insights, we found similar results for outbound tourism. Countries with higher financial inclusion scores saw a significant increase in outbound tourism expenditure. This effect was particularly pronounced in countries with smaller inbound tourism sectors, suggesting that these countries can leverage financial inclusion to diversify their tourism industry and promote economic growth.
Traditional vs. Digital Financial Inclusion: Which is More Effective?
While both traditional and digital financial inclusion can impact tourism, their effectiveness might differ.
- Traditional financial inclusion, measured by access to bank branches, ATMs, and deposit accounts, has shown a consistently positive impact on tourism demand in empirical studies.
- The evidence for digital financial inclusion, as measured by access to and usage of mobile money accounts and internet banking, is more mixed. While theoretically, digital financial services should make transactions easier for tourists and promote tourism, the empirical findings are less conclusive.
This discrepancy could be attributed to various factors:
- Limited Adoption and Infrastructure: The adoption of digital financial services and the supporting ICT infrastructure is still developing in many EMDEs, limiting the impact of digital financial inclusion on tourism.
- Data Constraints: The relatively recent emergence of digital financial services also means there is less data available for robust empirical analysis, potentially obscuring its true impact on tourism.
Policy Implications: How Can EMDEs Leverage Financial Inclusion for Tourism Growth?
The findings of these studies offer valuable insights for policymakers in EMDEs looking to leverage financial inclusion to boost their tourism industries:
- Expand Access to Financial Services: Policies that promote access to bank accounts, credit, and insurance, particularly for SMEs in the tourism sector, can contribute to the growth and development of the industry.
- Promote Digital Financial Inclusion: While the evidence is still emerging, investing in digital financial infrastructure and promoting the adoption of mobile payments and internet banking can help attract tourists and enhance their experience, ultimately boosting tourism demand.
- Target Outbound Tourism: Countries with smaller inbound tourism sectors can leverage financial inclusion to promote outbound tourism among their citizens. This can provide a much-needed boost to the domestic tourism sector and enhance the country’s global image, potentially leading to increased inbound tourism in the long run.
By adopting a multi-pronged approach that emphasizes financial inclusion, EMDEs can create a more resilient and thriving tourism industry that contributes to sustainable economic growth and development.
To cite the articles:
Gopalan, S., & Khalid, U. (2024). How does financial inclusion influence tourism demand? Empirical evidence from emerging markets and developing economies. Tourism Recreation Research, 49(3), 639-653.
Gopalan, S., & Khalid, U. (2023). Promoting outbound tourism through financial inclusion: Evidence from emerging markets and developing economies. Annals of Tourism Research Empirical Insights, 4(1), 100086.
Link to this articles:
https://doi.org/10.1080/02508281.2022.2028084
Usman Khalid, PhD 